Targeted monetary policy and bank lending behavior

Abstract: We exploit an allocation rule set by the ECB for the first series of TLTROs to study the effects of targeted monetary policy on banks’ credit supply to firms. Combining transactionlevel data from the Italian credit register and an instrumental variable identification strategy, we find that targeted longer-term central bank liquidity decreased rates and increased loan amounts, also avoiding some unintended consequences of untargeted measures, such as carry-trade strategies and risk shifting. We show that the outward shift in banks’ credit supply was heterogeneous, taking place only in more competitive banking markets, with stronger effects for smaller and safer firms.